Dream Responsibly

Posted on 16th January 2017

In an age when entrepreneurism has exploded in popularity – egged on by the innumerable Apprentice-esque TV shows that make such a mockery of the profession – it’s hardly surprising that a chasmic gap has opened up between the aspiration and the reality. This article is intended as an antidote to those typically saccharine and unrealistic popular portrayals.

While starting a business may have the potential to provide you with a more rewarding life, there are no guarantees and no shortcuts. Taking the plunge is not for the faint of heart – the mortality rate remains nightmarishly high. Of the half a million businesses that will be launched in the UK in 2017, a quarter will fail within year one. Half will not see the end of year three.

Assuming that you are still reading this (having resisted the urge to gingerly retreat to the safety of gainful employment), the good news is that new businesses do survive, and whether you become a positive or a negative statistic is mostly within your control. Laying a solid foundation with meticulous planning – before building on it with a diligent work ethic – remains the cornerstone of commercial success.

▼Start With Why

Before taking the first step, I urge you to examine your true motivations for embarking on such an epically arduous journey. Understanding what it is that brings meaning to your life will dictate the appropriate route to take. I say this because more and more people these days feel an overarching need to be busy. Perpetually busy people equate being busy with being important and of value, i.e their self-esteem is inextricably linked to their level of work activity. Their maniacal mantra is: ‘I am in the business of busyness – the busier the better!’ If this describes you, you are perfectly suited to the micro-management model of business building, whereby you are both the boss and the employee. Robert Frost hit your nail squarely on the head when he wrote: ‘By working faithfully eight hours a day, you may eventually get to be boss and work twelve hours a day.’ In fact – if you work frantically enough – you can avoid any meaningful engagement with your personal life whatsoever.

If your motivation is purely monetary, you may be interested to know that numerous studies conducted over the past decade have conclusively proven that money really does buy happiness. There is a small footnote to this however: the plateau is approximately £50,000 per annum; anything you earn beyond will make little or no difference to your level of happiness. Furthermore, chronically high levels of stress – like those that come with establishing your own business – tend to be a real happiness-buster over time. Incidentally, the ‘Buying Happiness’ research also shows that the way in which you spend your money makes a significant difference to how happy it can make you. In particular, a life experience such as a restful holiday provides considerably more lasting happiness than material goods. This presents quite the catch 22 for the aforementioned berserkly busy business people, who are surely too busy to take a holiday; and would only spend the holiday thinking about work if they did. Off to Louis Vuitton they go!

If, like me, your motivation is freedom – in terms of your time, quality of life and financial means – my recommendation is that you design and build your company as a machine that will not ultimately require you to be its operator. The idea that you can own the machine that you built and have someone else operate it for you is incomprehensible to many people, yet I assure you that this recusant mindset leads directly to the Holy Grail of personal freedom. Helpfully, it also adds value in terms of a potential exit strategy: companies that are not owner-managed invariably achieve higher valuations.

▼Leprechauns

Our modern culture of instant gratification is plagued by delusional wannabe entrepreneurs. The pursuit of a ‘get-rich-quick scheme’ is idiocy akin to chasing a rainbow in the hope of finding the pot of gold. Producing a bonafide pot of gold takes time, tenacity and eye-watering amounts of work. Be under no illusions about the sacrifices you will need to make if you are to launch a startup successfully.

Answering two fundamental questions will help you to decide whether you would be best suited to a full-time, part-time, spare-time or seasonal business, or indeed whether you are cut out for starting any business at all: 1) How much time are you willing and able to commit to it, and 2) how little money – if any – can you afford to earn in its formative years?

In the slurry of syrupy ‘entrepreneur’ memes that pollute the internet, there is one that actually captures the essence of successful business building rather well: ‘Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.’ The only caveat I would add to this – and it is a big one – is that anything that is going to significantly improve the quality of the rest of your life is most probably going to take more than a ‘few’ years to build (I would set aside five, but even then, you will have been lucky).

▼Formation Flying

There is plenty to be said for having a wingman or wingwoman. They may have the skills or experience that you lack and / or the capital that the business needs. Either reason justifies entering into a partnership.

The complimentary skills rationale is particularly useful when starting a business organically; when it is unlikely that you will have the money to employ someone who can fulfil an essential role that you are not suitable for. Having said that – if you are mercenarily minded and have the funds to pay someone to do the same job – an employee is usually preferable to a partner in the long term (it means that you are not obligated to share any profit that your business may make, or the proceeds of sale if you ever execute your exit strategy). Bear in mind however that nobody will ever be as motivated and energetic as a business owner who has everything to play for, and building a business is a lot more fun if you have the right partner to share the thrill of the ascent with. If you remain convinced that you possess the broad spectrum of every skill required and can do it all single-handedly, then good luck to you, Narcissus.

Should you find yourself in the position of ‘founding partner’, structuring your partnership in a responsible and realistic way enables you to retain control of the business while sharing the profits with your partner fairly. A true 50:50 division of ownership is the kiss of death – the business arena is not La La Land. The norms of human nature dictate that the partners will disagree on key issues at some point, spending endless amounts of time attempting to convince each other of their views. For as long as this nonsense continues (which can be indefinitely in a true 50:50 partnership), the board is deadlocked and literally cannot move forward, damaging both the company and all those who work within it. Successful partnerships require a clear decision-making framework on which to grow. For decisions to be made dynamically and in order to get things done, responsibility must be allocated within a business to give each partner the controlling authority for the appropriate field. For fundamental issues that affect the entire business, one partner – usually the ‘Chairperson’ – must have the final say, if ever a final say is needed. Who this power falls to is usually dictated by a historic disproportion in the investment of money, experience, and burden of risk borne. In my opinion, the closest you can get to the spirit of a 50:50 partnership in any professionally run company is 51:49 and – if you take it this far – you should ideally believe that the business will not work at all without your partner.

Never take on a partner because they are a friend – this is a lethally effective way to ruin a friendship; many people pour their heart and soul into their business and very much view it as the concomitant of their self-worth. The potential for conflict when ego and money are involved should not be underestimated.

▼20 / 20 Vision

Most successful entrepreneurs identified the niche to be filled before they dreamt up the vision and made it into reality – not the other way around. Any examples of exception are simply those that prove the rule (and they will have been flukes). Beware of randomly searching for ideas to suit your inclination to set up a business for the sake of setting up a business. It has been my experience that when someone wants something – or likes the idea of something – there is an unfortunate tendency to imagine that which is not there. Bearing in mind that whimsical blue sky thinking is responsible for some of the worst business ideas in history, I strongly advise you to allow your open-on-impact parachute concept to marinate before you plough your life savings into it.

Innovation is not a prerequisite for success. Many a stellar business has flourished by simply taking an existing offering and making it better – the bulk of Richard Branson’s Virgin empire was founded on the ethos of reinventing the wheel. Pure originality is useful, though not essential; you can simply be better, or cheaper, or – ideally – both. It is wise to avoid competing on price alone however, because doing so may not be always be enough to win customers over. Being cheaper is of course always a huge selling point in certain markets, but the consumer must believe in your brand in the first place and have the confidence that you are the real deal. Nothing will debase your brand kudos quicker than prolific discounting. If it transpires that the price point of your offering is so low as to make turning a profit all but impossible, it is likely that your business model was not viable to begin with.

▼Write the Blueprint

As stiff and boring as it may seem, writing a comprehensive business plan is wholly worthwhile, regardless of whether you are applying for any funding and even if the only people who end up reading it are your friends and family. The process of putting pen to paper – particularly when it comes to projecting the figures for your profit and loss, cash-flow and balance sheet – will focus your thinking by forcing you to explain exactly what your business is, how it will stack up financially, where it fits into the market, who your customers are, what you sell, how you sell it, and what you plan to do with your business in the long term. Even if you are only mirror-pitching, subjecting your idea to this structured scrutiny may well reveal it is barking lunacy. This is not the realisation that you want to be having when you have just invested your last pound in it and publicly stated that it is going to be the next Facebook. Far better to have this little eureka moment before you do any damage; when you can still make any necessary adjustments in sandbox mode.

▼Crystal Ball vs. Grim Reaper

Nothing is more important in business than having a sound grip on your finances. Anybody who blunders through each day without knowing the whereabouts of every penny is not ‘in business’ at all – they are asleep at the wheel, careering down the motorway in the wrong direction. Getting the figures wrong will annihilate both your finances and your reputation, and the ripples will spread much further than you can imagine. Most people underestimate the grave responsibility that comes with owning a company. I may have cut my teeth the hard way and learned invaluable lessons through humbling failure, but it took me many, many years of hard work to recover. You can avoid this by doing your homework properly first instead.

Accurate cash-flow forecasts – updated in real time – are the proverbial crystal ball and are your only real defence against the prolific Grim Reaper of fledgling businesses. Be pessimistic when it comes to your projected figures – under-forecast your revenues, over-forecast your costs. The essence of business is really quite simple: income must exceed expenditure – ideally in that order – and you must track every single penny obsessively. The equation for success in business is as straightforward as the one for losing weight (eat less, move more) yet there are morbidly obese people making themselves miserable everywhere. It is the same in business – the theory is proven; the practice requires staunch discipline.

A common area of fiscal ineptitude arises from the difference between cash-flow and profitability. Profitable businesses fail due to negative cash-flow, whereas businesses operating at a loss survive for as long as their cash-flow is positive. Monthly profit and loss reports that correlate with your cash-flow forecast are a necessity because understanding both profitability and cashflow – and how they interrelate – are the only things that can give you the foresight with which to steer your ship. Essentially, these tools enable you to see the oncoming iceberg – and figure out how to steer around it – before the crunch comes.

▼Speaking the Language

If you cannot read and interpret accounts, you simply do not understand the language of business. There is a plethora of self-help books on the subject out there, but the most straightforward and user-friendly I have come across is ‘Understanding Accounts’ by Stephen Brookson. The prevailing misconception that the accountant is responsible for financially steering the business has become the obituary of many a venture. The fact is that the only person that is ultimately responsible for the financial welfare of your business is you.

▼Feigning Innocence

Financial cross-contamination is a deadly sin; countless business owners have sunk the ship – and all the poor souls who sailed in it – by treating the company coffers as their personal bank account. This nefarious behaviour is born of building upon foundations of sand; a catastrophic oversight that occurred at the planning stage (if any planning took place at all, which it probably did not).

The way it should work is this: Assuming that you do not have personal reserves enough to enable you to wait until the business is profitable and cash-flow positive before drawing any money by way of dividend, your startup capital must include a modest survival salary for you. Alternatively – as long as you have good reason to believe that your company is on target to make sufficient profits before the financial year ends – you can take modest director’s loan drawings in lieu of declaring sufficient dividends to clear the outstanding balance (providing of course that cash-flow is positive enough to tolerate such ongoing payments in the first place). The key word in either scenario is ‘modest’ and the salient point is that payment should be made as strictly and as professionally as any payment to any other member of staff.

It is infinitely easier to forgive the actus reus (guilty act) if it was committed in the absence of the mens rea (guilty mind, i.e understanding or intent). What you will often see instead are unscrupulous business owners jetting off on holiday, quaffing champagne, eating lobster, paying the mortgage on their house, meeting the finance payments for the car(s)…..yet all the while their staff are paid late or not at all, the overdue supplier invoices are piling up, and their premises are falling further into a sorry state of disrepair. When the guillotine inevitably falls, the business owner pleads sympathy, waxes lyrical about the blood, sweat and tears he purports to have poured into the venture, blames everyone other than himself for the failure, and takes shelter from the carnage he has created under his coward’s umbrella of limited liability. Staff have lost their jobs (often having worked without remuneration), suppliers have provided products and services for which they have not been paid (sometimes to such an extent that they themselves go bust in turn) and taxpayers lose out on the monies that the owner should have been holding on trust for HMRC. In the face of such dire consequences – arising from dishonest and irresponsible actions – the mens rea defence is patently absurd.

It is precisely through this perversion of the capitalist creed that company law leaves itself open to abuse: the table is set for the amoral business owner to have his cake and eat it – to suck the lifeblood of the company’s cashflow to fund his lifestyle, safe in the knowledge that the statute of limited liability will most likely protect him from misappropriated monies being clawed back.

Moral issues notwithstanding, the legal reality is this: a company – enshrined as it is in commercial law – is an entity all it’s own, just as though it were a person. Your duty as a company director will always be to act in the best interests of the company, not in the best interests of yourself. Understanding this separation is crucial; one of the criteria that the government use for prosecuting or disqualifying a company director on the grounds of unfit conduct is ‘using company money or assets for personal benefit’. The fair warning in this could not be clearer.

▼Your Staff Trust You

As Benjamin Franklin famously wrote: ‘in this world nothing can be said to be certain, except death and taxes’. If you employee people, you are obliged to operate a payroll; you must deduct their PAYE tax and – if they earn more than £155 per week – National Insurance (NI) from their pay. You may also need to deduct things like student loan repayments or pension contributions. Every time you make payment to an employee, you should provide them with a payslip that shows exactly how much they have earned and what deductions you have made.

All of the above involves a large element of trust: the government trusts you to pay the income tax and any other contributions; the employee trusts you to pay their income tax and things like National Insurance on their behalf. The money does not belong to your company, nor does it belong to you – the money belongs to your employees, and their money is due to the government via you.

Unethical business owners often deduct amounts equivalent to PAYE (and anything else applicable) from their employees pay, but – rather than paying it over to the government – swallow the money into the company’s beleaguered cash-flow, or even pocket it for themselves. Incredibly, it is the unfortunate employee that is held responsible in these circumstances; HMRC’s somewhat peculiar stance is that the money is ultimately owed by the employee, regardless of the fraudulent behaviour of the business owner. Again, the law seems to leave itself wide open to abuse here, but it is important to remember that such laws are predicated on the theory that business owners are honest and upstanding members of society. (In practice, it can be more like giving guns to monkeys).

▼HMRC Trust You

You have a duty to understand how VAT works and whether your business will be required to charge it. Broadly speaking, when a business reaches the point of taking £83,000 in one financial year, it must be registered for VAT. At this point you will need to charge 20% on top of everything you sell (unless you sell reduced or zero rated goods) and show the breakdown on all the invoices and receipts that you issue. Again, the key point here is that the VAT you charge is not your money; it is HMRC’s money – your company merely holds it on trust for the government. The classic schoolboy error that new business owners make is gleefully banking the VAT they have been charging as though it is some sort of 20% Brucie Bonus. They have somehow convinced themselves that they have taken £X, when in fact they have only taken £Y. Lo and behold, some three months later, the VAT man comes knocking for his £Z (£X minus £Y). “How unreasonable!” cries the new business owner, having spent all the money that was never his to begin with and bankrupting his fledgling company in doing so. How unreasonable indeed.

▼Powered by the People

The most powerful asset of any business is the people who work within it. A business is nothing without solid people, and this holds true for all the strongest businesses that are known for generating goodwill. Your team members should be happy in their environment and naturally motivated.

Be obsessively selective about recruitment – if you don’t employ idiots, you won’t need to rule with a rod of iron. Dictatorships are unpleasant and unnecessary; intelligent human beings – operating on a level playing field – rarely need to be told what to do. Establishing an incentivised structure with a clear pathway to success is the key (human nature will do the rest). I am proud to say that the staff of my group of companies treat the business as their own and work largely under their own steam. Many have been on the team from inception and have steadily worked their way up – credit is always given where credit is due.

▼False Prophets

Before you taxi to the runway, please undertake your own primary research on what starting and running your own business really involves. There are several excellent websites that offer free advice for startups: Business Link, Start Up Donut, Smarta and Startups.co.uk. As these sites contain all the information you need, there is absolutely no need for you to pay a charlatan ‘business consultant’ to give you overblown advice that is already free of charge and in the public domain (if the consultant were genuine, they would advise you not to waste any of your startup capital on their piffle).

▼Fortune Favours the Brave

Nothing happens overnight – it took a million days to build Rome. Like anyone starting any business, you will need an abundance of grit if you are to stay the course. Dogged determination and adaptability will be of more use to you than God-given intelligence, but there is of course a fine line between bravery and recklessness. Make no mistake about the fact that there will be dark moments when things seem rather hopeless; knowing exactly what you are working towards is the only thing that will get you through those times.

While it may be true that running a business is pointless if the aim is not to turn a profit, the sole motive should not be money. Freedom, independence and the satisfaction derived from creativity should be the key motivators. Money is of course a welcome by-product, but there will often be easier ways to make considerably more of it, albeit less exciting ones.

Personally, I enjoyed myself most in those formative years; when everything was touch-and-go and we were desperately trying to get the aeroplane off the ground before reaching the end of the runway (and – in the case of one company – sellotaping the wings back on in mid-air). I therefore suspect that the adventure you are about to embark upon will bring you some of the best and the worst years of your life. I envy you this first flush of entrepreneurial youth and I urge you to savour every minute of it – it is as good as it gets.

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